President Obama punts away from free markets on student loan reform

Students listen as U.S. President Barack Obama makes remarks on student loans from the White House in Washington May 31, 2013.

Since the early days of his administration, President Obama has enjoyed a reputation as a higher education reformer. Just over four years ago he told a joint session of Congress that the country would regain its place as the most educated nation in the world, and his student loan reform bill phased out the role of private lenders in the federal aid system. Two years ago he famously warned colleges and universities that they were “on notice” to contain the rising cost of college. And his 2014 budget proposed tying the student loan interest rate to the market, an idea strikingly similar to one introduced by Republican Senators Tom Coburn and Richard Burr last year.

But in the Rose Garden on Friday, the president reminded us that while he sometimes sounds like a reformer, he often acts like anything but. Flanked by eager college students, the president reverted back to the 2012 campaign, warning Congress not to let the interest rate on subsidized student loans double on July 1. He scolded House Republicans for passing a bill that would do exactly that by tying the interest rate to the 10-year Treasury bill—just as the president’s budget proposed. “I’m glad that the House is paying attention to it,” he said, “but they didn’t do it in the right way.”

To be sure, there are important differences between the House bill and the proposal in the president’s budget. The president’s plan would fix the rate over the life of the loan, while the House bill would let rates vary (though graduates can lock in a rate if they consolidate their loans). The president’s proposal would place a lower rate on the means-tested subsidized loans (T-bill plus 0.93) than the unsubsidized ones (+2.93), while the House bill would put the same rate on each (+2.5). And the House bill would cap the interest rate at 8.5 percent; the president’s proposal has no cap.

But the gap between the two sides is simply not that wide. It’s certainly not wide enough to warrant the veto threat the president issued before the House voted on the Republican proposal. As the Wall Street Journal editorial page quipped in reference to the president’s feigned outrage, “A spread of 93 or 293 basis points means the president cares about young people, but 250 basis points signifies unspeakable cruelty?” In fact, the Congressional Budget Office suggests that the House proposal would provide lower rates than the president’s plan overall. And just days before the veto threat, Arne Duncan told Republican Rep. John Kline, chair of the House education committee: “We are interested in a long-term fix, we are interested in it being budget-neutral and look forward to continue conversations with you and others to find some common ground.”

Judging by the president’s Rose Garden theatrics, whatever common ground there was has evaporated. Rather than put sound policy above politics, it appears he has opted to pander out the clock on this one. In the process, he’s thrown away a rare opportunity to hash out a long-term, fiscally responsible bipartisan agreement—a species on the edge of extinction inside the beltway.

What’s more troubling is that President Obama didn’t even spell out what he thinks should happen before July 1. Has he completely abandoned his preference for a market-based rate? Is he willing to walk back his veto threat and hash out a market-based proposal that works? It’s unclear. What we do know is he thinks the House bill “isn’t smart and it isn’t fair.”

Perhaps the saddest part of the whole affair is what it says about our country’s approach to higher education policy. Between this year and last, our political leaders have spent months discussing and debating the interest rate attached to one-third of student loans; last year’s extension cost us $6 billion, but only saved borrowers about $9 a month. Meanwhile, thorny problems like rising tuition prices, stagnant completion rates, and a growing army of students with debt and no degree have festered. Fixing the student loan interest rate won’t do much of anything to solve them, yet it has sucked up all of the policymaking energy.

Students and taxpayers certainly deserve more from our political leaders. At the very least, we deserve a good faith effort to find a sustainable, long-term solution to the interest rate fiasco so that we can move onto more important issues. In this acrimonious political environment, such good faith requires presidential leadership, not partisan pandering. Unfortunately, despite his reformist rhetoric on student loans, President Obama has failed to walk the walk.

Andrew Kelly is a resident scholar at the American Enterprise Institute.